Rising costs push California cities to fiscal brink

Facing the same financial stressors that pushed San Bernardino toward bankruptcy, cities across California are slashing day-to-day services and taking other drastic actions to skirt a similar fiscal collapse.

For some, it may not be enough.

San Bernardino on Tuesday became the third California city to seek bankruptcy protection in the last month and, while no one expects the state to be consumed by municipal insolvencies, other cities teeter on the abyss.

PHOTOS: California cities in bankruptcy

"There are likely to be more in the future, but it's hard to know, since a lot of struggling cities may manage to work things out," said Michael Coleman, a fiscal policy advisor for the California League of Cities. "Some cities may not go into a bankruptcy, but they may dissolve. They may cease to exist."

Once rare, turning to bankruptcy has become a painful but enticing option for cities whose labor costs and municipal debt far outpace anemic tax revenues. The Bay Area city of Vallejo began the current trend in May 2008, filing for Chapter 9 bankruptcy protection because, city leaders said, salaries and benefits for its public safety workers were eating up too much of the general fund.

Last month, Stockton became the largest city in the state to seek bankruptcy protection after it was unable to come to agreement with its employee unions and creditors on a plan to close a $26-million gap in its general fund. On July 2, the tiny resort town of Mammoth Lakes filed bankruptcy papers in part because it was saddled with a $43-million court judgment it couldn't pay.

San Bernardino couldn't close a $45.8-million budget shortfall and would be unable make its payroll this summer. Days before Tuesday's City Council vote, the city of 211,00 people had just $150,000 in the bank. The city barely scraped together enough money to cover its June payroll.

The city had largely patched over its growing fiscal ills, exacerbated by the struggling economy, by tapping out its reserves over the last several years, according to a fiscal report submitted to the council before Tuesday's vote.

DOCUMENT: San Bernardino bankruptcy report

That 4-2 decision to file for bankruptcy protection was the easy part, San Bernardino Mayor Patrick Morris said Wednesday. Now the city has to pull together a plan to emerge from its fiscal crisis. It has already cut its workforce by 20% over the last four years.

Morris, a former judge elected on an anti-gang platform, says the city may have to dissolve its Fire Department or portions of the Police Department, an unavoidable reality when public safety accounts for nearly 75% of the general fund budget. The city would then contract with county and state agencies for those services.

"I think all possibilities should be on the table," Morris said. "That includes privatizing services; that includes regionalizing services."

Steve Tracy, a fire engineer and spokesman for the city firefighters union, said San Bernardino's labor groups already gave up $10 million in concessions. He blamed the financial crisis on the mayor and former city manager spending money on such pet projects as a new downtown movie theater.

"Before you start putting blame on the labor groups, get your own fiscal house in order," Tracy said.

Vallejo was in a similar bind when it filed for bankruptcy four years ago. Now Mayor Osby Davis wonders if the painful road to recovery was worth the cost.

The Bay Area city of 112,000 was forced to shut down two of its fire stations and today fixes just 10% of its crumbling roads. Its workforce, including police and firefighters, is about half its pre-bankruptcy size and those people left are "insanely" overworked.

Meanwhile, Vallejo spent $10 million on legal fees. It ended up with employee contracts that Osby thinks the city could have struck more cheaply if it had stayed out of bankruptcy court and turned to the bargaining table.

His advice to other cities on the financial brink? Don't do it.

"It takes an enormous toll on everyone," Davis said. "And you have the stigma of being a bankrupt city. How do you come out of being labeled a bankrupt city to one that is a desirable place to live?"

The San Bernardino City Council meets Monday to hash out the painful road ahead, including how to scrape together enough money to sustain city services before officially filing for bankruptcy protection. That could take a month or longer.

The city is expected to declare a fiscal emergency, which would trigger an "emergency exit" clause in the new state law that governs municipal bankruptcies. Otherwise the city would be forced to mediate with labor unions and creditors, an expensive, months-long process that Stockton slogged through without arriving at any agreement.

Karol Denniston, an attorney who helped draft the state bankruptcy law, said the emergency exit was designed for cases such as that of Orange County, which in 1994 became the largest county in the United States to go bankrupt, largely because of an unanticipated downturn in its risky investments.

Meanwhile, San Bernardino is likely to be scrutinized over how it managed to come to the brink of disaster, seemingly so quickly. City Atty. James Penman said budget figures submitted to the council had been fabricated for 16 years. Interim City Manager Andrea Miller was less harsh, saying the city's budget was erroneously said to be balanced for the last two years.

"The real horrible question here is: How do you end up with 30 days of liquidity?' Denniston said. "You have city leaders saying fiscal information was not accurate or reliable. This could create multiple layers of litigation that hurts creditors, employees and taxpayers for a very long time to come."

Rising public pension costs are one of the catalysts pushing cities into fiscal peril. In San Bernardino, the city's obligation to its employee retirement system rose from $1 million in the 2006-07 fiscal year to nearly double that in the current budget year. In three years, those costs are expected to swallow up 15% of the budget.

Pension spending grew an average of 11.4% a year in the state's biggest cities and counties between 1999 and 2010, roughly twice as fast as spending on public safety, social services, recreation, health and sanitation, according to a February report by the Stanford Institute for Economic Policy Research.

Joe Nation, a Stanford economics professor and co-author of the February report, thinks that for at least some cities, insolvency is inevitable unless they can wrest much bigger concessions on salaries and pensions from public employees.

"I think this is the tip of the iceberg in terms of the problem," Nation said. "Stockton was spending $12 [million] or $13 million on pensions 10 years ago. By 2010, it was $30 million … and will double again over the next five years, unless something is changed."

Meanwhile, as news of the bankruptcy wafted though San Bernardino on Wednesday, residents feared for the city's uncertain future.

"People are losing their homes because they have no jobs. It's been really tough, so it doesn't surprise us," said Rose Garcia, 46.

But Garcia, a stay-at-home mother, said she and her husband, a dispatcher for Vulcan Materials, are anxious about potential cuts to public safety.

"It's an uncertain feeling we have right now," she said. "We're actually talking about moving."

phil.willon@latimes.com

catherine.saillant@latimes.com

abby.sewell@latimes.com

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